ADDRESS 


I 


0 


By 


W.  J.  HARAHAN, 


President  of  The  Chesapeake  and  Ohio  Railway?  Company 


At  the 


ANNUAL  DINNER 

Of  the 


HUNTINGTON  CHAMBER  OF 
COMMERCE 

HUNTINGTON,  WEST  VIRGINIA 

Friday,  May  12,  1922 


Digitized  by  the  Internet  Archive 
in  2015 


https://archive.org/details/addressbywjharahOOhara 


ADDRESS 


BY 

W.  J.  HARAHAN, 

President  of  The  Chesapeake  and  Ohio  Railway  Co. 


The  railroads  are,  and  have  been  for  many  years,  the 
subject  of  criticism,  much  of  which  is  propaganda. 
Most  of  such  emanations  originate  from  sources  which 
have  a selfish  interest  in  the  propagation  of  the  mis- 
information, but  a great  deal  of  it  comes  from  innocent 
people  who  merely  repeat  what  they  hear,  because  it 
sounds  plausible  and  so  far  as  they  know  is  the  truth. 
The  railroads  have  tried  to  meet  this  flood  in  every 
way  that  would  seem  to  be  effective,  but  it  is  hard  to 
make  an  impression  which  will  not  be  dissipated  by 
the  ever-recurring  deluge.  A statement  from  one  who 
has  dealt  with  the  various  affairs  of  the  railroads  for 
over  forty  years  and  who  has  had  qualifying  experience 
in  every  detail  of  railroad  operation  and  management 
should,  perhaps,  be  entitled  to  some  weight  in  the  con- 
sideration of  this  matter. 

Railroad  men  generally  feel  that  the  Transportation 
Act  passed  at  the  time  the  railroads  were  returned  to 
private  control,  on  March  1,  1920,  represented  the  best 
thought  in  connection  with  railroad  regulation  and 
that  it  was  designed  to  remedy  the  bad  spots  in  the 
situation  which  had  developed  as  regulation  had  pro- 
gressed. Running  through  this  Act  it  may  be  perceived 
that  amongst  its  various  requirements  and  as  an  in- 


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tegral  and  important  part  of  its  plan,  the  fact  is  set 
up  that  the  railroads  must  be  honestly  and  efficiently 
managed  as  a prerequisite  to  the  benefits  to  be  obtained 
from  the  provisions  of  the  Act.  This  is  as  it  should  be. 
No  business  should  succeed  unless  it  is  honestly  and 
efficiently  managed.  To  secure  this  much  desired  aim 
in  management  its  affairs  must  be  conducted  along  the 
lines  of  good  business  practice  and  must,  consequently, 
be  as  free  of  guilt  as  is  possible  from  those  things  which 
I have  designated  as  criticism  in  the  first  sentence. 

What  are  the  criticisms  to  which  I refer?  What  are 
the  things  that  are  said  to  our  discredit?  What  are 
the  facts  ? 

Among  those  things  that  are  said  to  our  discredit, 
perhaps  the  following  are  the  more  important : 

That  the  railroads  are  over-capitalized ; 

That  the  railroads  have  no  method  of  rate  making 
worthy  of  the  name,  but  that  their  rates  are  a hodge- 
podge of  inequities  and  past  practices  built  up  by  “rule 
of  thumb” ; 

That  they  do  not  economically  manage  their  proper- 
ties, have  no  system  of  properly  determining  and 
watching  their  expenses,  etc. ; 

That  their  relations  with  the  public  are  not  on  the 
basis  best  calculated  to  win  its  support  and  sympathy; 

That  the  Congress  guaranteed  them  a certain  specific 
interest  on  the  investment,  which  concession  is  not 
granted  any  other  business ; 

That  the  officers’  salaries  are  enormous  and  out  of 
proportion  to  other  salaries  paid  in  other  lines  of  busi- 
ness ; 

That  the  private  cars  of  officers  are  an  abuse,  because 
of  the  enormous  expense  involved  in  maintaining 
them ; that  they  are  a luxury  which  no  man  should  be 
allowed  to  enjoy  at  the  expense  of  any  business ; 

That  our  relations  with  our  employes  are  such  that 
strife  and  hostility  are  engendered  and  not  healthy  co- 


4 


operation  such  as  is  necessary  for  the  success  of  any 
business ; 

That  rates  should  be  reduced  and  that  such  reduction 
would  be  of  benefit  to  the  railroads,  and  that,  conse- 
quently, the  railroads  are  short-sighted  in  not  making 
such  reduction  at  once. 

There  are  perhaps  other  things  that  may  form  the 
basis  of  criticism,  but  these  seem  to  be  the  most  im- 
portant ones  and  the  ones  upon  which  I should  seek 
to  throw  the  searchlight  of  truth  so  far  as  I am  able 
to  do  it.  To  treat  these  in  the  order  above  set  forth, 
I am  beginning  with: 

Over-Capitalization 

Most  business  men  are  aware  of  the  fact  that 
there  has  been  under  way  for  the  last  eight  years 
the  valuation  of  the  railroads  by  the  government. 
When  this  has  been  finally  completed  there  will  be 
set  at  rest  this  much  mooted  question,  which  is 
nearly  always  the  last  argument  of  the  gentleman  who 
argues  that  the  railroads  are  making  excessive  profits. 
In  other  words,  when  he  is  shown  conclusively  that 
the  business  is  being  honestly  and  efficiently  managed, 
his  retort  is,  “You  are  over-capitalized,”  and  he  is 
strengthened  in  his  innuendoes  by  the  fact  that  there 
have  been  a few  evident  and  glaring  instances  of  over- 
capitalization,  which  are  familiar  to  most  business  men 
who  read.  In  any  business  of  any  character  there  are 
people  who  are  not  honest  in  its  conduct.  I am  quite 
willing  to  make  the  strongest  character  of  assertion 
that  the  proportion  of  railroads  which  are  fallen  into 
dishonest  methods  is  no  greater  than  is  the  case  in  any 
other  business,  and  I say  just  as  emphatically  that  the 
proportion  of  railroads  which  are  over-capitalized  is 
very  small  indeed  as  compared  to  the  total  valuation 
of  the  railroad  property  of  the  country.  The  over- 
capitalization  which  occurred  must  have  taken  place 
prior  to  1907,  now  fifteen  years  ago,  because  ever  since 


that  date  the  Interstate  Commerce  Commission  has  had 
absolute  control  of  the  accounts  of  the  railroads  and  has 
specified  and  scrutinized  what  has  been  charged  to 
capital  account.  The  property  investment  of  the  rail- 
roads on  December  31,  1921,  was  $20,144,581,415. 
There  was  at  the  same  time  in  the  hands  of  the  public 
railway  capital  amounting  to  $17,016,074,420.  The 
capital  outstanding  was  $20,238,472,022,  the  difference 
between  the  last  two  figures  being  accounted  for  by  se- 
curities owned  and  held  by  other  railroad  companies. 
You  will,  therefore,  note  that  the  public  has  paid  just 
a little  more  than  $17,000,000,000  for  property  costing 
over  $20,000,000,000,  provided,  of  course,  that  the  book 
value  of  $20,000,000,000  is  nearly  the  correct  value. 

One  of  the  most  convincing  evidences  that  the  prop- 
erty account  of  the  carriers  is  not  far  wrong  is  that  in 
arriving  at  the  rates  set  by  the  Interstate  Commerce 
Commission  in  1920  to  produce  six  per  cent  on  the  value 
of  the  property,  as  prescribed  in  the  Transportation 
Act,  the  Commission  determined  upon  $18,900,000,000 
as  the  tentative  valuation  of  the  railroads  for  such  pur- 
pose and  did  so  upon  the  most  searching  and  intelligent 
scrutiny  of  its  records  and  the  figures  before  it,  as  was 
demonstrated  by  the  testimony  of  Commissioner  Hall 
before  the  Senate  Committee  on  Interstate  Commerce 
January  5,  1922.  While,  of  course,  the  Commission 
tried  to  make  as  honest  a valuation  as  it  could  from  the 
information  at  its  disposal,  yet  it  can  be  conceived  that 
it  would  in  arriving  at  this  valuation  not  over-value  the 
properties;  in  fact,  in  line  with  its  usual  careful  and 
conservative  policy  it  would  probably  rather  under- 
value them  slightly.  The  difference  between  their 
valuation  — that  is,  $18,900,000,000  — and  the  book 
value — $20,138,000,000 — is  about  six  per  cent.  There 
are  many  disputed  points  in  valuation  which  far  more 
than  cover  such  a comparatively  slight  difference. 

The  facts  so  far  disclosed  by  the  valuation  which  is 
being  made  by  the  government  indicate  quite  clearly 


6 


that  there  will  be  a substantial  vindication  of  the  ac- 
curacy of  the  property  accounts  of  the  railroads  when 
this  valuation  is  completed. 

Let  me  here  call  attention  to  the  fact  that  rates  are 
based  upon  the  value  of  the  property  used  by  the  public 
and  not  upon  the  value  of  stock  and  bonds. 

The  testimony  usually  given  as  to  railroad  valua- 
tion by  those  seeking  to  discredit  it  is  generally  not 
substantiated  by  any  facts,  but  is  merely  based  upon 
impressions  gained  from  the  few  cases  of  manipula- 
tion which  have  occurred  in  railroad  history,  but  it  is 
always  given  as  a final  argument  against  specific  rate 
increases.  It  should  not  be  given  credence  unless  sup- 
ported by  actual  facts  and  figures.  It  is  not  fair  to  the 
railroads  to  merely  accept  such  a statement  without 
such  facts  or  figures,  and  it  will  not  merely  do  to  call 
attention  to  the  bad  history  of,  say,  one  or  two  railroad 
corporations  and  attempt  to  say  that  because  their 
history  was  unsavory  this  applies  to  the  whole  railroad 
situation.  The  receiverships  of  the  past  and  the  in- 
vestments from  surplus  of  the  stockholders  have  un- 
doubtedly wiped  out  all  undue  capital  charges  upon 
most  of  the  over-capitalized  properties.  In  any  event, 
the  burden  of  proof  as  to  over-capitalization  should  be 
upon  the  one  challenging  the  figures,  rather  than  upon 
the  railroads.  Surely  under  the  strict  supervision  of 
the  Interstate  Commerce  Commission  since  1907  there 
can  be  little  room  for  the  thought  that  railroad  manipu- 
lation could  be  effective.  To  sum  up  all  the  evidence  so 
far  developed  indicates  quite  clearly  that  substantially 
the  values  claimed  by  the  railroads  will  be  proven. 

Alleged  Unscientific  Method  of  Rate  Making 

The  making  of  the  rates  of  the  railroads  of  the  United 
States  was  a process  of  evolution.  Before  railroads 
were  placed  in  operation  the  freight  and  passenger 
carrying  was  done  by  the  crude  facilities  then  in  use. 
These  facilities  had  established  rates  for  the  perform- 


ance  of  their  services.  Railroad  rate  makers  naturally 
used  these  as  a basis  from  which  their  calculations 
were  begun.  As  time  went  on  and  conditions  became 
more  complex  it  became  necessary  to  multiply  the  num- 
ber of  rates  needed  to  cover  all  movements  of  freight 
required.  In  each  case  it  became  necessary  to  de- 
termine what  rate  it  would  be  necessary  to  make  so  as 
to  move  the  greatest  possible  tonnage  of  the  commodity 
which  it  was  desired  to  move.  A calculation  was  made 
always  to  insure  that  no  rate  was  established  which  was 
less  than  what  is  designated  as  the  out-of-pocket  cost, 
which  represents  the  amount  paid  out  for  the  direct  cost 
of  handling  the  business,  like  train  and  enginemen’s 
wages,  fuel,  repairs  of  cars,  and  the  other  immediate 
costs  of  operation.  If  after  this  out-of-pocket  cost  was 
fixed  it  was  found  that  a reasonable  contribution  would 
be  made  to  the  remainder  of  the  charges  attending  the 
owning  and  operating  of  the  railroad  by  a rate  which 
would  move  a proper  amount  of  the  commodity,  then 
the  rate  was  established.  This  gradually  built  up  a 
system  of  rates  which  were  fitted  to  the  commercial 
needs  of  the  country  and  which  built  up  the  great  rail- 
road network  of  the  country. 

While  this  may  not  at  first  thought  seem  to  be  a very 
scientific  method,  yet  it  was  a perfectly  natural  and  a 
good  business  one,  and  the  best  proof  that  it  was  com- 
mercially efficient  is  the  great  development  of  all  busi- 
ness, both  railroad  and  commercial,  which  was  brought 
about  by  this  method. 

Of  course,  there  sprang  up  during  the  practice  of  this 
method  of  rate  making,  abuses  such  as  rebating,  fa- 
voritism, etc.,  but  these  were  only  passing  phases  of 
the  process  of  evolution.  Notwithstanding  the  fact 
that  they  were  so  widely  heralded,  they  affected  only  a 
small  proportion  of  the  total  business.  It  has  been  esti- 
mated by  a careful  statistician  that  the  rebates  in  their 
palmy  days,  when  they  were  practiced  the  most,  only 
affected  two  per  cent  of  the  total  freight  revenue  of  the 


8 


country.  It  is,  however,  a matter  of  great  congratula- 
tion to  this  generation  of  railroad  men  that  rebating 
and  other  objectionable  practices  have  disappeared,  as 
they  are  not  consonant  with  good  business  practice  or 
honest  administration. 

As  time  has  gone  on  it  has  been  found  possible  to 
establish  more  exact  methods  of  rate  making  and  a 
number  of  graduated  scales,  modeled  upon  scientific 
reasoning,  have  been  applied,  and  they  will  increase 
as  business  grows  and  the  potential  capacities  of  the 
railroads  are  more  nearly  reached;  that  is,  as  the 
density  of  traffic  increases  we  are  better  able  to  work 
out  a scientific  plan,  because  of  the  smaller  absorption 
per  unit  of  overhead  and  fixed  costs.  The  fact  that  it 
is  hard  to  work  out  an  exact  mathematical  rule  for  rate 
making  is  further  demonstrated  by  the  necessity  for 
adjustments  like  differentials,  to  overcome  physical 
handicaps  because  of  varying  conditions,  and  quite  fre- 
quently it  is  necessary  to  make  a rate  for  the  purpose 
of  establishing  a market  for  a product  which  it  is  de- 
sired by  a manufacturer  to  develop.  Then  again  comes 
the  necessity  for  the  establishment  of  a different  rate 
per  ton  mile  on  such  substances  as  coal,  iron  ore,  stone, 
etc.,  as  compared  with  products  like  fruit,  general 
merchandise  and  other  more  valuable  articles.  A purely 
mathematical  method  of  rate  making  would  ascribe  a 
certain  amount  in  cents  or  mills  per  ton  mile  for  any 
ton  of  freight  moved  which  would  be  so  high  that  coal 
and  like  commodities  could  not  be  moved,  while  the  rate 
would  be  ridiculously  low  on  the  higher  valued  com- 
modities. 

In  spreading  the  cost  of  transportation  over  all 
commodities  you  can,  therefore,  see  that  there  must 
be  room  for  the  use  of  judgment  in  distributing  it,  so 
as  to  produce  the  greatest  amount  of  movement  and  be 
fair  to  all  users  of  the  roads.  The  checks  and  balances 
on  this  method  of  rate  making  come  from  the  rivalry 
of  railroads,  of  markets,  and  of  merchants,  each  striv- 


9 


ing  to  protect  their  own  situation.  There  is  also  the 
protection  of  the  various  commissions,  who  are  alert  to 
protect  the  people.  Rates  now  are  much  out  of  ad- 
justment, because  of  the  percentage  raises  made  by  the 
Railroad  Administration  during  the  time  it  operated 
the  railroads  and  the  other  percentage  raises  which 
have  been  made  from  time  to  time.  These  will  all  be 
ironed  out  in  time  and  placed  upon  a proper  basis. 
All  railroads  are  actively  engaged  in  doing  this  now, 
but  it  must  be  done  in  an  orderly  way  and  with  due 
reflection,  because  it  is  not  uncommon  to  find  that  a 
rate  adjustment  proposed  to  rectify  a local  situation 
extends  in  its  ramifications  until  it  covers  a large  part 
of  the  country.  A comparison  of  the  rates  of  the  rail- 
roads of  the  United  States  with  those  of  any  other 
country  shows  that  our  rates  bear  a most  favorable 
comparison. 

Economical  Management  of  the  Railroads 

The  time  has  now  arrived  in  railroad  history  when  it 
is  absolutely  essential  that  these  properties  be  managed 
as  economically  as  possible.  This  is  not  only  prescribed 
by  the  Transportation  Act,  but  self-preservation  de- 
mands it,  because  the  limited  margin  between  income 
and  outgo  is  so  constantly  narrowing  that  unless  it 
is  conserved  by  the  most  careful  and  economical  man- 
agement it  will  entirely  disappear,  as  it  did  during 
Government  control,  because  of  the  adverse  conditions 
affecting  that  period.  I beg  to  assure  you  that  most 
railroads  are  watching  this  matter  in  the  most  minute 
detail  consistent  with  proper  management.  In  consider- 
ing our  expenses  we  determine  what  is  the  lowest 
amount  we  should  spend  upon  our  maintenance  of  way 
so  as  to  safely  maintain  the  property.  This  amount 
must  be  spent  as  a minimum.  We  also  determine  what 
it  is  necessary  to  spend  upon  our  equipment  to  main- 
tain it  in  a proper  condition.  We  then  make  an  esti- 
mate as  to  what  our  earnings  from  the  various  sources 


10 


producing  earnings  will  be,  and  it  is  surprising  how 
close  an  estimate  can  be  made  by  those  accustomed  to 
watching  the  earnings  of  the  individual  properties. 
When  these  are  estimated  the  expenses  are  then  set  so 
as  to  produce  the  proper  results,  which  means  the  ex- 
penditure of  enough  to  insure  absolute  safety  and  as 
much  more  as  is  advisable  from  a true  business  stand- 
point to  improve  and  build  up  the  property,  so  as  to 
make  it  an  efficient  machine  for  the  adequate  and 
economical  handling  of  the  business  which  it  serves. 
When  these  expenses  are  determined  allotment  is  made 
to  the  various  officers  whose  duty  it  is  to  spend  the 
money  down  to  the  foremen,  and  they  are  then  care- 
fully checked  in  detail.  Those  in  charge  of  work  are 
required  to  spend  each  day  only  that  which  they  are 
allowed  to  spend  and  fit  in  with  the  predetermined 
expense  as  a whole.  The  results  shown  by  the  amount 
of  work  turned  out  by  the  various  foremen,  the  various 
shops  and  other  units  of  operation,  are  carefully 
checked  against  each  other  so  that  a standard  perform- 
ance is  worked  out  and  so  that  the  performance  of  those 
obtaining  the  best  results  may  be  set  up  as  a standard 
and  those  results  attained  rather  than  that  of  the 
mediocre.  For  instance,  the  number  of  ties  put  in  by 
the  various  foremen  are  watched,  for  the  setting  up 
of  a proper  standard.  The  number  of  engines  dis- 
patched from  the  various  roundhouses  are  watched,  to 
see  that  no  individual  roundhouse  exceeds  a proper 
cost  for  the  work  it  has  to  perform.  The  tonnage 
which  should  be  handled  by  each  freight  train  is  first 
placed  at  the  proper  amount,  considering  grade  condi- 
tions, size  of  engines  and  economy  of  operation,  and 
then  a daily  check  is  kept  upon  each  train,  so  that  the 
standard  thus  set  up  can  be  obtained. 

I only  mention  these  detail  matters  to  show  that  the 
planning  and  spending  of  railroad  expenses  are  not 
haphazard,  but  are  gone  into  with  great  care  and  with 
real  planning. 


11 


Government  control  of  operation  had  a great  effect 
upon  the  morale  and  the  performance  of  the  men,  but 
they  are  coming  back  and  I am  sure  will  get  closer  to 
the  old  standard  as  time  goes  on.  Whatever  may  be 
said  to  the  contrary,  it  was  necessary  for  the  Govern- 
ment to  take  over  the  roads,  not  because  they  were 
broken  down,  as  so  many  think,  but  because  war  opera- 
tion of  railroads  is  essentially  and  necessarily  different 
from  peace  operation.  In  war  operation  every  effort 
had  to  be  bent  towards  one  end — the  winning  of  the 
war.  All  efforts  had  to  be  so  co-ordinated;  individual 
desires  had  to  disappear;  traffic  had  to  be  sent  by  the 
railroads  best  equipped  to  handle  that  traffic.  So  far 
as  the  whole  railroad  system  of  the  country  was  con- 
cerned, this  meant  that  the  business  of  some  railroads 
had  to  be  restricted,  others  had  to  be  increased.  In- 
dividual managements  were  not  in  position  to  bring 
this  situation  about  in  a way  which  would  be  conducive 
of  the  best  results.  In  peace,  how  different  the  condi- 
tions. It  is  then  for  the  benefit  of  the  public  that  the 
greatest  possible  incentive  be  given  to  individual  en- 
terprise, so  that  ample  latitude  be  given  to  the  develop- 
ment of  service  as  a means  of  controlling  and  develop- 
ing business.  The  public  undoubtedly  gets  the  benefit 
of  this  individual  activity  as  compared  with  the 
straight  edge  line  laid  down  by  Governmental  rule. 
This  was  never  more  forcibly  shown  than  in  the  declin- 
ing months  of  the  Railroad  Administration,  after  the 
war  was  over,  when  the  public  became  much  disgrun- 
tled at  the  exactions  and  rules  of  the  Railroad  Admin- 
istration. 

Another  very  potent  reason  for  the  Government 
taking  over  the  railroads  was  that  before  they  were 
taken  over  on  January  1,  1918,  the  various  depart- 
ments of  the  Government  endeavored  to  and  did  issue 
orders  in  such  number  requiring  priority  in  movement 
of  one  shipment  as  against  another  that  the  railroads 
were  hopelessly  involved  in  attempting  to  carry  them 


12 


out,  and  this  was  a factor  which  hastened  the  taking 
of  the  railroads  over,  so  that  all  the  facilities  might  be 
co-ordinated.  I do  not  criticise  the  detail  management 
of  the  Railroad  Administration,  but  their  general  man- 
agement was  bad  in  many  respects,  because  it  was  too 
big  a machine  to  attempt  to  handle  successfully  from 
one  central  point.  Maintenance  of  track  was  not  kept 
up  and  the  freight  cars  were  allowed  to  scatter  all  over 
the  United  States,  so  that  while  the  total  number  of  bad 
order  freight  cars  was  not  materially  greater  at  the 
end  of  Federal  control  than  it  was  at  the  beginning,  yet 
their  condition  was  so  much  worse,  because  foreign 
roads,  even  under  Government  control,  will  not  do  the 
work  on  a car  that  the  road  that  owns  the  car  will,  and 
the  Government  maintenance  allowance  was  inadequate 
to  fully  repair  all  cars.  The  roads  naturally  under  these 
conditions  repaired  their  own  cars  first.  Another  great 
factor  in  the  situation  was  that  the  rates  were  not  ad- 
vanced during  Federal  control  to  take  care  of  the  in- 
creased expenses  as  they  occurred,  no  attempt  being 
made  to  adjust  the  rates  to  the  total  expenses,  which 
state  of  affairs  necessarily  brought  about  under-main- 
tenance. 


Relations  With  the  Public 

We  are  sometimes  accused  of  being  indifferent  in  our 
relations  with  the  public  to  the  extent  of  arbitrary 
methods.  It  is  certainly  far  from  our  intention  to  carry 
out  such  a line  of  policy,  because  we  feel  most  emphatic- 
ally that  it  is  most  condemnable  and  likely  to  produce 
results  that  are  damaging  to  the  Company  interested  as 
a whole.  I think  much  of  this  comes  from  the  fact  that 
many  disputes  are  encountered  in  railroad  operation  as 
between  different  people  and  different  communities. 
One  community,  for  instance,  may  want  passenger 
schedule  set  for  a train  and  another  community  may 
want  a different  schedule  for  the  same  train ; we  must 
decide  against  one  or  the  other.  The  one  whom  we  must 


13 


decide  against  is  likely  to  resent  it  and  blame  the  rail- 
road rather  than  the  conditions.  There  are  many  of 
these  disputes  which  occur  in  railroad  problems  and 
somebody  must  be  decided  against  each  time.  To  take 
care  of  such  situations  the  Interstate  Commerce  Com- 
mission and  the  State  Commissions  are  set  up  as  arbi- 
ters. I believe  in  them  most  thoroughly.  I believe  each 
have  their  own  peculiar  and  particular  function.  There 
is  a definite  place  for  the  State  Commissions  in  handling 
State  matters,  police  powers,  and  rate  matters  when 
they  do  not  affect  interstate  rates,  although  it  is  rare 
when  they  do  not.  They  should  not  in  my  opinion  han- 
dle rate  matters  where  they  do  interfere  with  inter- 
state rates,  because  a rate  system  is  more  or  less  like 
a house  of  cards,  which  will  fall  down  if  one  card  is 
moved,  and,  therefore,  so  interdependent  that  a rate 
made  in  Maine  can  and  does  often  affect  a rate  situa- 
tion in  California.  The  Commissions  are  a great  pro- 
tection to  the  people  and  to  the  railroads,  and  I for  one 
advocate  working  most  harmoniously  and  closely  with 
them  for  the  advancement  of  the  common  good.  I be- 
lieve that  as  time  goes  on  it  will  be  found  that  the 
least  possible  interference  with  the  detail  management 
of  the  railroads  will  be  worked  out  by  the  Commissions 
themselves  which  will  produce  the  best  results. 

Guarantee  of  Net  Income 

One  of  the  most  fallacious  pieces  of  misinforma- 
tion that  has  come  out  in  recent  years  is  the  news 
spread  about  that  the  Transportation  Act  guaranteed 
the  railroads  six  per  cent  on  their  investment,  and 
this  coupled  up  with  the  fable  of  excessive  over-capi- 
talization makes  a condition  which  seems  to  give  the 
agitator  opportunity  for  the  exploitation  of  that  fal- 
lacy. The  law  contains  no  such  guarantee.  The  car- 
dinal principle  of  the  law  is  that  the  railroads  must 
be  allowed  to  earn  a reasonable  interest  on  their 
value,  and  until  March  1,  1922,  a reasonable  rate  of 


14 


interest  was  set  at  5%  %,  plus  y2%  which  the  Interstate 
Commerce  Commission  in  their  discretion  might  allow 
for  the  purpose  of  providing  improvements,  etc.  They 
were  then  instructed  by  the  law  to  make  such  rates  as 
would,  under  honest  and  efficient  management,  prob- 
ably produce  such  a revenue  as  would  perhaps  bring 
this  about.  The  Interstate  Commerce  Commission  did 
their  best  to  carry  out  this  provision  of  the  law,  but 
on  account  of  the  fearful  shrinkage  in  the  volume  of 
business  in  1921  the  rates  they  set  for  that  period  only 
produced  3.3%.  It  was,  therefore,  in  no  sense  a guar- 
antee and  it  only  produced  3.3%,  or  a little  more  than 
half  of  the  6%  set  as  a reasonable  amount.  The  Gov- 
ernment is  not  in  any  sense  obligated  to  make  up  a 
cent  of  the  difference  between  3.3%  and  6%,  conse- 
quently has  not  paid  and  will  not  pay  the  railroads  one 
cent  of  money  for  that  purpose. 

Officers’  Salaries 

There  is  an  impression  prevalent  in  some  quarters 
that  the  railroads  are  paying  extravagant  salaries  to 
their  officers.  The  truth  is,  that  there  is  scarcely 
another  business  in  the  country  where  brains  com- 
mand such  a small  percentage  of  the  total  income. 
Since  1916,  the  aggregate  salary  of  all  the  general 
officers  of  Class  One  roads  in  the  United  States — 
not  merely  the  Presidents — has  been  less  than  one  per 
cent  of  their  operating  revenues.  Between  1916  and 
1921  the  increase  in  the  average  officer’s  salary  was 
about  thirty  per  cent.  For  other  employes,  excluding 
division  officers  as  well  as  general  officers,  the  rate  of 
annual  pay  was  about  seventy-five  per  cent  higher  in 
December,  1921,  than  in  1916.  It  must  be  reflected  that 
the  operations  of  the  railroads  require  a great  variety 
of  talent.  The  Division  Superintendent,  for  instance, 
must  be  a man  who  has  had  splendid  all-around  ex- 
perience; the  duties  of  his  position  require  a man  of 
action;  emergencies  are  constantly  occurring,  requir- 


15 


ing  a knowledge  of  many  different  kinds  of  business. 
Therefore,  railway  officials  earn  their  pay.  There  is 
no  time  for  sloth.  And,  too,  considering  the  fact  that 
the  officers  have  to  attend  continual  investigations  and 
hearings  of  various  kinds,  all  requiring  great  prepara- 
tion, knowledge  and  experience,  you  will  know  that 
they  have  to  work  many  hours  a day. 

It  is  a generally  accepted  fact  that  railroad  officers’ 
salaries  are  lower  than  are  paid  by  industrial  concerns 
to  officers  having  corresponding  responsibilities.  Be 
that  as  it  may,  the  railroads  must  continue  to  pay  at 
least  the  present  scales  if  they  would  attract  and  keep 
a class  of  men  commensurate  with  the  importance  of 
their  work.  I have  known  in  my  own  experience  of  the 
simple  change  from  an  incompetent  to  a competent 
officer  making  the  difference  of  hundreds  of  times  the 
salary  paid  to  the  incompetent  man.  Personnel  is  the 
great  factor  in  business  success. 

Officers’  Private  Cars 

Of  ail  the  myths  of  railroad  propaganda,  one  of 
the  most  prevalent  is  that  of  the  officers’  cars.  These 
cars  are  not  private  cars  in  any  sense  of  the  word. 
They  are  merely  traveling  offices.  When  an  officer 
goes  over  the  road  he  must  have  some  efficient 
means  of  seeing  the  property.  He  cannot  stand  up 
on  the  rear  end  of  a sleeping  car  or  coach  over 
thousands  of  miles  of  railroad.  He  finds  it  necessary 
to  stop  off  at  out  of  the  way  places  where  there  are 
no  hotels  in  order  to  efficiently  inspect  the  property 
intrusted  to  his  care.  They  also  must  use  these  cars 
as  their  offices,  in  which  to  handle  their  mail ; it  is  hard 
to  conceive  the  amount  of  mail  that  a general  officer 
of  a large  railroad  has  to  handle,  and  it  must  be  cur- 
rently kept  up  or  they  become  swamped  in  a short  time. 
The  use  of  the  officers’  cars,  therefore,  is  for  the  pro- 
duction of  greater  efficiency,  which  means  more  to  the 
railroads  than  if  the  officers  were  required  to  ride 


16 


around  in  sleepers  or  coaches  and  not  given  an  oppor- 
tunity to  see  the  railroad  in  an  efficient  manner,  and  I 
can  assure  you  that  when  a man  has  ridden  around  in 
private  cars  for  twenty-five  years  he  gets  tired  of  them 
and  welcomes  an  opportunity  of  getting  away  from 
them. 

Considering  it  from  the  standpoint  of  furnishing  of 
food,  lodging,  etc.,  as  a general  proposition  a number 
of  officers  are  taken  along  on  these  trips,  and  it  is  con- 
sequently cheaper  to  care  for  them  in  the  car  than  for 
them  to  go  to  hotels,  as  they  serve  exactly  the  same  food 
that  a man  is  usually  accustomed  to — no  more  or  less 
luxurious.  The  cars  generally  are  not  of  expensive 
construction  and  not  furnished  with  luxurious  fittings. 

Relations  With  Our  Employes 

This  is  one  of  the  most  troublesome  subjects  with 
which  we  have  to  deal  today.  The  situation  is  difficult 
because  of  the  period  of  readjustment  now  in  progress. 
Naturally  men  do  not  like  to  have  their  wages  reduced. 
It  seems  necessary  that  we  must  insist  upon  their  being 
so  reduced,  because  it  is  our  earnest  belief  that  their 
wages  in  some  occupations  are  out  of  line  with  those 
paid  in  other  industries,  and  we  cannot  sustain  a situ- 
ation in  which  we  pay  more  than  someone  else  does  for 
the  same  work  under  the  same  conditions. 

When  we  attempt  to  do  what  seems  to  us  our  plain 
duty  in  this  respect  we  encounter  the  opposition  of  our 
men,  which  we  much  regret,  but  we  must  do  our  duty  as 
we  see  it.  We  can  in  this  state  of  affairs  only  refer  it 
to  the  United  States  Labor  Board,  the  constituted  gov- 
ernment authority,  to  determine  who  is  right  in  their 
contention.  I am  a firm  believer  in  the  principle  that 
contented  men  produce  the  best  results  and  I advocate 
going  far  to  attain  that  end.  I believe  most  thoroughly 
in  doing  to  them  what  I would  they  would  do  to  me 
were  our  positions  reversed.  On  our  railroad  particu- 
larly we  have  a fine  body  of  men,  whom  I admire  more 


17 


as  time  goes  on.  The  great  trouble  with  the  railroads  is 
that  there  are  so  many  men  so  widely  scattered  that 
it  is  impossible  to  have  the  personal  contact  that  the 
best  relations  require.  This  is  conducive  to  the  spread 
of  rumors  by  parties  interested  in  so  doing,  which  bring 
up  at  times  sore  spots  because  of  statements  attributed 
to  the  officers  in  certain  instances  which  were  never 
thought  of  by  them.  This  is  really  a most  potent  source 
of  discontent,  and  it  is  our  constant  endeavor  to  instill 
in  the  minds  of  our  employes  that  when  such  rumors 
come  they  should  believe  that  they  are  not  true  until 
they  have  a chance  to  verify  them,  as  such  an  attitude 
will  go  far  towards  alleviating  that  situation. 

Question  of  Reduction  of  Rates 

The  situation  today  is,  as  I have  shown  above,  that 
the  rates  set  by  the  Interstate  Commerce  Commission 
in  accordance  with  the  provisions  of  the  Transporta- 
tion Act  have  produced  a return  on  the  investment  of 
only  3.3%  for  the  last  year.  I am  convinced,  as  also  set 
out  above,  that  the  railroads  have  been  operated  hon- 
estly and  efficiently — in  fact,  I am  positive  that  there 
was  not  as  much  money  spent  upon  the  maintenance 
of  railroad  properties  in  the  year  1921  as  should  have 
been,  and,  consequently,  if  the  full  amount  had  been 
spent,  the  return  would  have  been  less  than  3.3%. 
Surely  the  railroads  should  not  be  asked  to  work  on  a 
lower  basis  than  6%,  and  3.3%  must  be  inadequate. 
The  only  way  that  we  can  obtain  the  necessary  6%  is 
either  by  reduction  in  our  expenses  or  by  an  increase 
in  business.  It  is  the  argument  of  those  desiring  that 
we  make  these  reductions  that  they  will  stimulate 
such  an  increase  in  business  as  will  mean  the  pro- 
vision of  the  necessary  earnings  to  provide  the  6%. 

Insofar  as  the  stimulation  of  business  is  con- 
cerned, the  railroads  have  gone  into  that  matter 
thoroughly  and  carefully,  because  of  the  fact  that 
irrespective  of  any  public  pressure  they  feel  that 


13 


rates  should  be  reduced  if  that  will  stimulate  the 
business,  and  it  is  true  business  sense  to  make  reduc- 
tions if  they  will  produce  the  results  which  it  is  thought 
that  they  will  produce  in  the  way  of  stimulation  by 
those  advocating  the  reductions.  It  requires  a very 
large  increased  volume  of  business  to  make  up  for  rate 
reduction.  For  instance,  for  each  $100  in  freight 
earnings  in  1921  the  operating  expenses  were,  say, 
80%,  and  this  is  less  than  they  were,  they  actually 
being  83%,  but  say  80% — this  left  a net  return  of  $20. 
If  such  freight  earnings  of  $100  were  to  be  reduced 
10%,  this  would  leave  $90.  With  the  same  expense 
of  80%,  unless  the  expenses  could  be  reduced,  the  net 
return  would  then  be  $10.  If  we  assume  that  the 
operating  expenses  for  additional  business  would  be 
only  70%,  instead  of  80%,  because  of  the  overhead 
charges  being  taken  care  of,  it  would  require  the 
earning  of  $33.33  additional  to  produce  additional  net 
of  $10  so  as  to  make  up  the  original  $20.  This  means 
a 37%  increase  on  the  $90.  It  seems  improbable  that 
we  would  get  such  an  increase  through  stimulation 
of  business;  in  fact,  I think  it  is  impossible  for  some 
time.  We  have  reduced  a number  of  rates  and  we  have 
generally  found,  that  they  did  not  produce  the  stimula- 
tion which  it  was  thought  that  they  should.  The  only 
thing  that  we  can  do  is  to  watch  the  situation  carefully, 
make  readjustments  as  they  should  be  made,  and  reduce 
the  rates  to  the  extent  that  we  are  able  to  make  reduc- 
tion in  expenses.  Any  other  course  of  action  means 
that  we  will  simply  have  a lot  of  railroads  which  will 
either  be  bankrupt  or  so  near  it  that  they  cannot  pro- 
vide the  facilities  necessary  to  handle  the  country’s 
business,  and  to  my  mind  this  is  going  to  be  the  critical 
situation  insofar  as  the  future  is  concerned,  and  there 
is  no  question  but  what  the  business  man  will  find  that 
inability  to  handle  the  business  as  it  develops  in  the 
future  will  be  of  far  greater  pecuniary  damage  to 
him  than  the  reduction  in  rates  of  ten  per  cent  or 


19 


fifteen  per  cent  will  benefit  him.  In  other  words,  in 
one  instance  he  will  not  be  able  to  do  the  business  at 
all.  The  fact  of  the  matter  is  today  that  the  railroads 
are  lying  dormant  so  far  as  improvements  and  in- 
creases in  facilities  are  concerned.  While  this  does  not 
hurt  today,  yet  it  will  when  business  revives. 

We  have  a long,  hard  road  in  front  of  us.  We  make 
an  appeal  for  the  help  of  the  public.  We  are  desirous 
of  doing  what  is  necessary  to  conquer  the  situation. 
I believe  that  the  solution  of  the  railroad  situation  is 
private  ownership.  I believe  that  the  Transportation 
Act  passed  in!920,  above  referred  to,  should  be  given 
a thorough  trial  before  it  is  changed.  As  Mr.  Herbert 
Hoover  has  said  with  reference  to  government  owner- 
ship : 

“No  one  with  a week’s  observation  of  government 
railways  abroad,  or  with  government  operation  of  in- 
dustry in  the  United  States,  will  contend  that  our  rail- 
ways could  ever  be  operated  as  intelligently  or  as 
efficiently  by  the  Government  as  through  the  initiative 
of  private  individuals.  Moreover,  the  welfare  of  its 
multitude  of  workers  will  be  far  worse  under  govern- 
ment operation.” 


20 


